Question

1. Assume that a Parent company acquires a 75% interest in its Subsidiary on January 1, 2016.  On the date of acquisition, the fair value of the 75% controlling interest was $1,800,000 and the fair value of the 25% noncontrolling interest was $600,000.  On January 1, 2016, the book value of net assets equaled $2,400,000 and the fair value of the identifiable net assets equaled the book value of identifiable net assets (i.e. there was no AAP or Goodwill). The parent uses the equity method to account for its investment in the subsidiary.

On December 31, 2017, the Subsidiary company issued $1,500,000 (face) 6 percent, five-year bonds to an unaffiliated company for $1,380,218 (i.e. the bonds had an effective yield of 8 percent).  The bonds pay interest annually on December 31, and the bond discount is amortized using the straight-line method.  This results in annual bond-payable discount amortization equal to $23,956 per year.

On December 31, 2019, the Parent paid $1,540,849 to purchase all of the outstanding Subsidiary company bonds (i.e. the bonds had an effective yield of 5 percent).  The bond premium is amortized using the straight-line method, which results in annual bond-investment premium amortization equal to $13,616 per year.

The Parent and the Subsidiary report the following financial statements for the year ended December 31, 2020:

Income Statement
	3	Subsidiary
Sales	$12,100,000	$1,240,000
Cost of goods sold	(9,060,000)	(710,000)
Gross Profit	3,040,000	530,000
Income (loss) from subsidiary	131,355
Bond interest income	76,384
Bond interest expense		(113,956)
Operating expenses	(2,030,000)	(291,000)
Net income	$  1,217,739	$   125,044

Statement of Retained Earnings
	Parent	Subsidiary
BOY Retained Earnings	$8,036,000	$1,115,000
Net income	1,217,739	125,044
Dividends	(170,000)	(26,000)
EOY Retained Earnings	$9,083,739	$1,214,044

Balance Sheet
	Parent	Subsidiary
Assets:
Cash	$  1,559,000	$  596,131
Accounts receivable	3,100,000	760,000
Inventory	3,105,000	520,000
Equity Investment	2,027,887
Investment in bonds	1,527,233
PPE, net	9,700,000	4,450,000
	$21,019,120	$6,326,131
Liabilities and Stockholders’ Equity:
Accounts payable	$  1,650,000	$   620,000
Current Liabilities	1,700,000	700,000
Bonds payable		1,452,087
Long-term Liabilities	2,080,000	750,000
Common Stock	1,020,000	540,000
APIC	5,485,381	1,050,000
Retained Earnings	9,083,739	1,214,044
	$21,019,120	$6,326,131

Required:

Provide the consolidation entries and prepare a consolidation worksheet for the year ended December 31, 2018.

Answer 1

PARTICULARS	AMOUNT	AMOUNT
[C]
Income (loss) from subsidiary*	$131,355
Income attributable to non-controlling interest**	$31,261
Dividends		$ 26,000
Equity investment***		$111,855
Non-controlling interest***		$24,761
To eliminate inter-company income, investment and dividends.

PARTICULARS	AMOUNT	AMOUNT
[E]
Common stock	$ 540,000
APIC	$1,050,000
Retained earnings	$1,115,000
Equity investment		$2,028,750
Non-controlling interest		$676,250
To eliminate subsidiary's stockholders' equity.

PARTICULARS	AMOUNT	AMOUNT
[Ibond]
Bond payable (net)	$ 1,452,087
Interest income	$76,384
Equity investment	$112,718
Investment in bonds (net)		$1,527,233
Interest expense		$113,956

*$125,044 + $113,956 - $76,384 = 162,616 - (125,044 * 25%) = $131,355

** $125,044 * 25% = $31,261

*** $131,355 - (26,000*75%) = $111,855

       NCI $31,261 – ($26,000 * 25%) = $24,761

Particulars	Parent	Subsidiary		Debit		Credit	Consolidated Income Statement
Sales	$12,100,000	$1,240,000					$13,340,000
Cost of goods sold	(9,060,000)	(710,000)					(9,770,000)
Gross Profit	3,040,000	530,000					3,570,000
Income (loss) from subsidiary	131,355		[C]	131,355			0
Bond interest income	76,384		[Ibond]	76,384			0
Bond interest expense		(113,956)			[Ibond]	113,956	0
Operating expenses	(2,030,000)	(291,000)					(2,321,000)
Net income	1,217,739	125,044					1,249,000
Consol. NI attributable to NCI			[C]	31,261			(31,261)
Consol. NI attributable to parent	$1,217,739	$125,044					$1,217,739

Particulars	Parent	Subsidiary		Debit		Credit	Consolidated Income Statement
Statement of Retained Earnings
BOY Retained earnings	$8,036,000	$1,115,000	[E]	$1,115,000			$8,036,000
Net income	1,217,739	125,044					1,217,739
Dividends	(170,000)	(26,000)			[C]	$26,000	(170,000)
End. Retained earnings	$9,083,739	$1,214,044					9,083,739

Particulars	Parent	Subsidiary		Debit		Credit	Consolidated Income Statement
Balance Sheet
Assets:
Cash	$ 1,559,000	$ 596,131					$ 2,155,131
Accounts receivable	$3,100,000	$760,000					$3,860,000
Inventory	3,105,000	520,000					3,625,000
Equity investment	2,027,887		[Ibond]	112,718	[C]	111,855	0
					[E]	2,028,750
Investment in bonds	1,527,233				[Ibond]	1,527,233	0
PPE, net	9,700,000	4,450,000					14,150,000
	$21,019,120	$6,326,131					$23,790,131
Liabilities and stockholders’ equity:
Accounts payable	$ 1,650,000	$620,000					$ 2,270,000
Current liabilities	1,700,000	700,000					2,400,000
Long-term liabilities	2,080,000	750,000					2,830,000
Bonds payable		1,452,087	[Ibond]	1,452,087
Common stock	1,020,000	540,000	[E]	540,000			1,020,000
APIC	5,485,381	1,050,000	[E]	1,050,000			5,485,381
Retained earnings	9,083,739	1,214,044					9,083,739
Non-controlling interest					[C]	24,761	701,011
					[E]	676,250
	$21,019,120	$6,326,131	∑	4,508,805	∑	4,508,805	$23,790,131